Capitalism Defined, Part VI: Schumpeter and the Origins of Socialism

While Joseph A. Schumpeter (1883-1950) was best known for the term "creative destruction," which he identified as one of the positive features of capitalist economies, that term (which he did not coin) only hints at the subtlety and power of his analysis of capitalism. I have defined capitalism so far in this series as an economic system in which investors commodify economic inputs and mobilize them through markets to generate a financial return on capital investments. Schumpeter's definition of capitalism was much more dynamic: he identified it as "a form or method of economic change" (82), driven by entrepreneurs who in their pursuit of profits invariably and radically transformed farm organization, transportation, materials technology, and living standards.

Schumpeter's initial economic research focused on the origins of business cycles, to which several previous economists had assigned regular periods of various lengths. He was particularly interested in the "long cycles" described by Russian economist Nikolai Kondratiev, who identified three sequential 55-year-long waves of economic boom and bust that began in 1790 and continued into the twentieth century. Kondratiev didn't specify the causes of these cycles, but Schumpeter argued they were the products of discrete industrial revolutions, caused by entrepreneurs' adoption of new technologies (like spinning jennies) or production of new goods and services (like rail transport). These revolutions produced not only profits for entrepreneurs but "avalanche[s] of consumer goods," which generally increased the purchasing power and improved the living standards of ordinary workers (67-68). Once the new methods of production had spread throughout the economy, however, markets became saturated with new goods and services, and firms which had borrowed heavily to expand or to adopt new technologies went bust. The result was growing unemployment and economic depression, which ended only when a new industrial revolution began and started the next cycle.

While the heroes of Schumpeter's economic narrative were individual entrepreneurs, he observed that it did not take long for the firms these innovators built to turn into monopolistic corporations. Nor did Schumpeter think this was a bad thing. Large corporations tended to be more efficient than small ones, because of their ability to employ economies of scale, and while critics of monopolies argued that they tended to stifle innovation, Schumpeter didn’t believe this was true. In the long term, he admitted, a monopolistic corporation might benefit by inhibiting technological change, thereby conserving its sunk costs in plant and equipment, but most corporations preferred the short-term profits that came from adopting new technologies and productive techniques – as evidenced by the investments most twentieth-century corporations made in research and development (96-97). Competition between firms thus might diminish over time, but competition between old and new productive methods remained constant.

Like Marx, Schumpeter believed that capitalism contained the seeds of its own destruction, though his explanation of how this occurred was subtler and more sociologically informed than Marx’s. Marx and Engels argued that capitalism would fall when an immiserated global proletariat discovered it had “nothing to lose but their chains.” Schumpeter countered that capitalism would fall when the bourgeoisie discovered they had nothing to fight for. He explained that the chief motives of capitalists were the drive to innovate – either to invent or to adopt others’ inventions – and the desire to accumulate capital. As capitalist economies became more dominated by large, “heavily bureaucratized” firms, however, entrepreneurs would encounter increasing constraints on their ability to innovate (134). Those who prospered would instead be those who could serve as cogs in a corporate machine or, at best, members of a corporate research team. Moreover, ownership of capital property would become less materially satisfying as the means of production came to be dominated by joint-stock companies, whose owners – shareholders – held their property in a highly “dematerialized and defunctionalized” way (142). Anyone who has worked for a large corporation or cast a proxy ballot in a shareholders’ election will recognize the truth of both of these observations. Essentially, Schumpeter concluded, the emergence of monopoly capitalism tended to prepare most people for life in a collectivist state, which offered the same amount of bureaucracy and greater economic security into the bargain.

Schumpeter added that the industrial-era bourgeoisie was a class singularly ill-suited to governance. They viewed the state as an impediment to their goals, and lacked the sense of responsibility that the European aristocracy had developed by the early modern era. At the same time, the bourgeoisie could not function without certain utilities, like roads and military protection, that the state provided, nor could it thrive without the existence of cities, which required considerable organization and political management to thrive. Capitalism, or rather capitalists, thus needed a "classe dirigiste" (136) to manage affairs of state. A.J.P. Taylor, in a quote I mentioned earlier in this blog, would confirm this statement with his observation on the post-Revolutionary French middle class. Schumpeter, who was more interested in the twentieth than the nineteenth century, merely concluded that this was another reason capitalists would eventually give political ground to labor union leaders, urban reformers, democratic politicians, and (to use James Burnham's adjective) "managerial" types. This is largely what did happen in most of the world's industrial countries in the mid-twentieth century, at least until the Reagan-Thatcher revolution in the 1980s.

(Citations above are from Schumpeter's Capitalism, Socialism, and Democracy [New York, 1942].)

Capitalism Defined, Part V: Polanyi and the Fictions of Free-Market Societies

While Max Weber founded what one might call the sociological study of capitalism, the Hungarian economist Karl Polanyi was among the first scholars to identify capitalism as a fit subject for anthropological study. Following the lead of Jacob Malinowski (whose study of Trobriand Islanders in the 1920s became a classic) and sociologist Ferdinand Tonnies (who developed the gemeinschaft/gesellschaft dichotomy), Polanyi argued that Adam Smith’s economic man, who pursued only profits and personal comforts, was a myth. The primary function of most human economies, Polanyi observed, was to improve participants’ social status and augment their “social assets,” not their store of worldly goods. In pre-state societies like the Trobriand Islanders’, people’s primary economic goals were reciprocity – the symmetrical exchange of goods as gifts, usually in a social context attended by ritual (7-9) – and redistribution, whereby chiefs accumulated goods for the purpose of giving them to followers. The former ethic promoted social cohesion, while the latter produced political hierarchies by tying clients to their chiefly patrons. Neither ethic, though, was typical of capitalist societies; indeed, one later ethnohistorian, Daniel Richter, called redistribution a “kind of upside-down capitalism” because it involved negative accumulation (Ordeal of the Longhouse [Chapel Hill, 1992], p. 22).

More sophisticated state societies, like ancient Greece, medieval Europe, or eighteenth-century Dahomey, had more complicated economies, but they still weren’t capitalistic. Most produced for household or local consumption, and the trade in which they engaged – which, granted, might be very valuable (like the spice and slave trades) – usually consisted of luxury goods bought and sold by social outsiders or state employees. These societies did employ various kinds of money, like cowry shells or gold coins, in trade, but Polanyi argued that they used money as a “semantic system” to represent and discharge particular social obligations, like bride price or fines (190-194). Production, consumption, and trade thus remained thoroughly “embedded” (82) in political or social relationships, and philosophers from these societies, like Aristotle, defined the "good life" as a communal one, where people took pleasure not in material accumulation and consumption but in festivals, theater, political debate, and even battle.

The primary innovation of capitalism, Polanyi argued, was to yank economic inputs out of these social contexts by commodifying them (30-32). The merchants, industrialists, and liberal economists of the 18th and 19th century developed and codified a new set of economic "fiction[s]" (32), like wage labor and free trade, which subordinated previous social relationships to the new imperatives of commodity exchange. They then used the power of the state, first in Britain, later in other countries, to remove all impediments to the commodification and exchange of inputs. They passed enclosure laws, built poorhouses, removed tariffs, and instituted a global gold standard. They thereby created a so-called "self-regulating market," which capitalists and liberal economists believed was natural but was in fact highly artificial and socially destructive. Capitalism, Polanyi argued, created a global wave of ghastliness, knocking down laws, customs, and institutions that might have mitigated its ill effects. Nineteenth-century India saw the destruction of its textile industry and the spread of famine due to rising grain prices; Native North Americans lost their land and went into a steep demographic and cultural decline; and twentieth-century African migrant laborers escaped starvation only by losing their homes, families, and culture.

One might argue (as I would) that Polanyi's conclusions are a bit shrill, since he observed in his earlier work that the British developed mechanisms for defending their society against capitalism's evils: trade unions, a protectionist movement, and the creation of a welfare state after 1906. Presumably, other societies injured by capitalism's "self-regulating market" were able to develop their own countermeasures, like the legal defense associations that Plains Indians established to recover some of their lost lands. One might also argue that Polanyi was merely adding another layer of sophistication to Marx's early analysis of the cultural bankruptcy of capitalism. This is in some ways, however, beside the point. Polanyi's real strength lies in his analysis of pre-capitalist economies and his careful differentiation of societies with some of the features of capitalism (like trade and currency) from those that are genuinely capitalistic. In defining a thing, it is helpful to understand what that thing is not; in the case of capitalism, it is very helpful to know that the great majority of human societies have not organized their economies according to its rules.

Quotes from George Dalton, ed., Primitive, Archaic, and Modern Economies: Essays of Karl Polanyi (Boston, 1968). See also Karl Polanyi, The Great Transformation (Boston, 1944); idem, "Traders and Trade," in Jeremy Sabloff and C.C. Lamberg-Karlovsky, eds., Ancient Civilization and Trade (Albuquerque, 1975), 133-154.

Quote of the Week

"In France, the bourgeoisie, after the great Revolution, resorted to every kind of desperate expedient for avoiding responsibility - empire, revived monarchy, sham monarchy, sham empire - until the failure of all left them with no escape from responsibility in the Third Republic, and even that perished from lack of a true governing class." A.J.P. Taylor, in The Habsburg Monarchy, 1809-1918 (new edition, London, 1948), p. 138. I don't think Taylor is entirely fair to the Third Republic, but I suppose it was hard for someone who remembered that republic's last few years to credit it with ever having produced responsible legislators or capable leaders.

[Image at right: the coat-of-arms of the aforementioned "sham monarch," Louis-Philippe (1830-48).]

The Arab 1848

Except for a brief period following last month's tsunami and nuclear accident in Japan, the attention of the world media has been focused this year on the revolutions underway in the Arab world. Several online commentators, most notably Tariq Ali and Andrew Sullivan, have tried to make sense of this multinational wave of uprisings by comparing it to the European revolutions of 1848, which had similar goals, spread with equal speed through Europe's cities a century and a half ago, and came – unfortunately for the insurgents – to a bad end. As I think this is actually a pretty fair historical comparison, I present herewith a short summary of the actual 1848 uprisings, which has to date been missing from these commentators' remarks.

Of the 1848 revolutions, one may say that they were caused by poor harvests, unemployment, the dissatisfaction of the educated middle class with repressive monarchical governments, and the related aspiration of romantic nationalists to create unified linguistic nation-states. The first rebellion of the year broke out in January in the Kingdom of Sicily, but the real flashpoint for the continental insurrection was Europe's cultural capital, Paris, where in February urban mobs expelled King Louis-Philippe and bourgeois legislators proclaimed the Second Republic. News of the French revolution spread quickly, thanks to cheap newspapers and widespread literacy. In Italy, insurgents forced King Charles Albert of Piedmont to grant his subjects a constitution and drove Austrian troops out of Milan; later that year an army organized by Italy's princes besieged Austria's forts in northern Italy. In Germany, liberal reformers convened the Frankfurt Assembly to promote a unified German republic, insurgents expelled the Grand Duke of Baden, crowds seized control of Berlin, and Wilhelm IV of Prussia felt obliged to issue a constitution creating a Prussian Assembly. In Austria, rebels seized control of Vienna and forced Metternich, symbol of the monarchical restoration of 1815, to flee for his life. The Austrian rebellion ultimately drove King Ferdinand, one of the more comically imbecilic of the Hapsburgs (famous for his demand "I am the emperor and I want dumplings!"), to abdicate in favor of his nephew Franz Joseph. Nationalist uprisings also broke out in Hungary and Romania.

In the shorter term, these revolutions were failures. The new French republic violently suppressed an uprising by Paris workers in June, and in December conservatives and rural voters seeking order elected the authoritarian Louis Napoleon as president. He overthrew the republic three years later. The Frankfurt Assembly never obtained any real power and degenerated quickly into a talking-shop. The Austrian monarchy regained control of Vienna and northern Italy, and recaptured Hungary in 1849 with Russian aid. The new Austrian emperor, Franz Joseph, held his throne for 67 years. The Sicilian and Romanian revolutions were suppressed. Europe's bourgeoisie discovered they hated proletarian radicalism more than authoritarian government, and became more conservative. This is all bad news for the Arab world, if the revolutions that began there this January follow the 1848 model.

There was, however, brighter historical news in the long term. Few of Europe's monarchs could ignore the crowds that besieged the continent's principal cities and drove their royal kinsmen from their thrones, and many decided that the best way to prevent future revolution was to grant at limited concessions to the more moderate protestors – usually a constitution and an elected parliament. These concessions prevented uprisings from occurring in Denmark and the Netherlands, and pacified insurgents in Prussia and Piedmont. Several Arab monarchs, including the kings of Morocco and Jordan, appear to be following this example (consciously or not) in 2011. None of the rest of Europe's monarchical governments felt they could ever again afford to ignore the popular will in their countries; gone forever were the days when, as in 1814-15, the princes of Europe could trade people like commodities at the conference table. Louis Napoleon, after his coup d'etat, felt the need to legitimize his rule with popular plebiscites, while Austria's emperor eventually (after losing northern Italy in the wars of the Risorgimento) granted limited autonomy to Hungary. Admittedly, there is another, darker solution that some governments devised to the problem of popular restiveness post-1848: uniting people through warfare, either foreign adventures (as with Louis Napoleon's new French Empire) or wars of national unity (as with Prussia in Germany and Piedmont in Italy). Let us hope the successors to the Arab 1848 resist the temptation to follow this particular example.

(My principal sources for the above are Michael Rapport's 1848: Year of Revolution [New York, 2009] and the first chapter of Eric Hobsbawm's Age of Capital [New York, 1975]; for a short introduction to the subject, see this article by Kurt Anderson.)